Rupee likely to strengthen in 2013

The rupee was volatile in the first half of 2012, but stabilised following the measures by global central bankers and policymakers back home. It dipped by over 3% against the dollar this year as oil and gold prices rose, pushing up the demand for dollar from importers. It touched an all-time low of Rs 57.30 in June, but recovered to around Rs 52 by October.

The rupee movement affects all of us. For investors, a weak rupee means lower profits. The companies with significant foreign currency borrowings or those which import raw material would have to shell out more.

For consumers, it means higher prices because the firms that import raw material are forced to hike prices. Perhaps the area where consumers will feel the pinch most is the spike in fuel prices. With the declining rupee, the crude oil import bill for the government has also gone up, forcing it to jack up the petrol prices.

What's in store in 2013

Most experts believe that the rupee will strengthen in 2013. The rebound in macro-economic data, along with the improved sentiment in the equity market and a likely rate cut by the RBI in January, points towards a better growth environment in the first half of the year. The FDI in retail vote in both the houses of Parliament has raised hopes that the government will also push other reform measures.

This would attract capital inflow, which could boost the rupee. "Most investment banks believe that India's problems are a thing of the past and a combination of lower inflation, lower interest rates and dedicated government actions will get it back on the growth path," says Arvind Chari, senior fund manager, Quantum AMC.

Some experts believe that the rupee will move in the Rs 52-56 band till the budget session, when there will be further clarity on reforms. Â Investment bank Credit Agricole expects the rupee to strengthen to Rs 52 against the dollar by the end of 2013, with the currency having priced in 'many of the fundamental problems it faces'.

However, concerns over the rupee have not ebbed as the trade deficit widened to an all-time high of $21 billion in October due to weak export growth. Besides, portfolio flows have not been sufficient to fund the dollar demand, putting a pressure on the local currency.

Moreover, the prevailing uncertainty in Europe and issues regarding the US fiscal cliff could once again impact the global risk appetite adversely and, hence, weaken the rupee. The possibility of the rupee appreciating could also be shortlived due to adverse domestic growth and a rise in inflation. So, keep an eye on the rupee this year too.